By - February 5, 2016

Handling Unpaid Leave Calculations

Handling Unpaid Leave Calculations

Many companies allow employees a variety of ways to receive time off from work, including paid time off, vacation, sick days, and unpaid leave. Unpaid leave for full-time, salaried employees is unique in that it results in an actual deduction of pay from an employee’s paycheck; consequently, it’s extremely important that HR and payroll departments know how to accurately calculate how much should be deducted for periods of unpaid leave.

Calculating Unpaid Leave for Salaried Employees

Luckily, it is a fairly straightforward process to calculate unpaid leave. However, this process is slightly varied for salaried employees versus hourly workers.

For Salaried Employees:

After verifying the employee’s annual pre-tax salary, you must convert that into a weekly salary amount and then a daily pay. This daily pay is then multiplied by the number of unpaid days that your employee used throughout the year. This is the amount that should be deducted from their payroll through your automated payroll software.

For Hourly Employees:

For hourly employees, a salary calculation cannot be made so simply. Since they are not working during their leave, they are not receiving paychecks for this time. However, this unpaid leave has to be tracked in order to determine their eligibility for health care benefits. Instead, the employer is responsible for determining the number of special unpaid leave hours. These hours can either be ignored completely or credited to both service hours and special leave hours while calculating average weekly hours worked to determine healthcare eligibility.

Note: Special unpaid leave cannot prevent an employee from returning work full-time. The employee may return to full-time status as long as they took this unpaid leave within 13 consecutive weeks (26 weeks for an educational organization).

How Is Unpaid Leave Affected by the FMLA?

The Family and Medical Leave Act (FMLA) allows eligible employees to take up to 12 weeks of unpaid leave in order to attend to a serious medical condition affecting themselves or a family member.

Although the FMLA leaves functions effectively like standard unpaid leave, it’s important to remember two key aspects of the law: that employees must continue to receive group health benefits, and they must be allowed to return to their jobs at the end of the leave period.

In other words, an employer is required to offer health benefits to a full-time employee taking FMLA leave (paid or unpaid). While retroactively looking back over a measurement period for tracking, an employer must disregard time off and count it as “worked time” in order to maintain full-time status for health benefits coverage. When this employee returns to work, they must be accepted back as a full-time employee and continue to be offered benefits coverage.

It is mandatory to allow eligible employees to take FMLA leave at their discretion. An employee is eligible for FMLA leave when:

  1. They have worked at least 1,250 hours during the previous 12 months – this works out to about 25 hours a week over the course of a year
  2. They are employed at a company location where there are 50 or more employees within 75 miles
  3. They have worked for the company for at least 12 months within the past seven years

Although the FMLA guarantees a period of 12 weeks of unpaid leave, employees are also allowed to take FMLA leave while using paid forms of leave like PTO, sick days, or vacation. FMLA leave is intended to be reserved for serious medical conditions, the birth of a child, or the caring of a newborn.

Considerations to Keep in Mind

It’s essential that you confirm that the employee intended to use unpaid leave; there is a possibility that they may have wanted to use sick days or PTO in order to cover their absence from work. An unfair (or unintended) deduction for unpaid leave can cause immense logistical headaches, as well as opening up the possibility for legal action. If you’re unsure, speak directly to the employee before initiating any deductions.

Most payroll software calculates unpaid leave deductions based on 8-hour workdays; if your company’s policy differs from this, you may need to make a manual adjustment in your payroll software.

The ACA and Unpaid Leave

There are numerous laws and regulations that govern employment status, employee time off, and the coinciding healthcare benefits. With Affordable Care Act reporting deadlines approaching, keeping track of employee hours and full-time status is more important than ever.

Whether you’re looking to become ACA compliant or just searching for a way to streamline personnel management, it’s important to keep in mind how changing ACA regulations can impact your data collecting and reporting.

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